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**UNITEDSTATESSECURITIES 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 June 30, 2001**

| **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) |

 

| **Chartered by the State of Washington**                        | **91-1691216**                        |
|-----------------------------------------------------------------|---------------------------------------|
|                                                                 |                                       |
| (State  or other jurisdiction of incorporation or organization) | (I.R.S.  Employer Identification No.) |

** **

| **1111 Third Avenue, Suite 250  Seattle, Washington** | **98101**   |
|-------------------------------------------------------|-------------|
|                                                       |             |
| (Address  of principal executive offices)             | (Zip  Code) |

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

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

As of July 31, 2001, 15,584,162 shares of common stockwere outstanding with no par value.

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**PACIFIC NORTHWEST BANCORP**

| **INDEX**      |                                                                                                                 |   |
|----------------|----------------------------------------------------------------------------------------------------------------------|--------|
|           |                                                                                                                 |   |
| **PART I.**    | **FINANCIAL INFORMATION**                                                                                            |   |
| **Item 1.**    | **Financial Statements**                                                                                             |   |
|           |                                                                                                                 |   |
|           | **Consolidated  Statements of Financial Condition as of June 30, 2001 and December 31, 2000**                        |   |
|           |                                                                                                                 |   |
|           | **Consolidated  Statements of Income for the three and six month periods ended June 30, 2001  and 2000**             |   |
|           |                                                                                                                 |   |
|           | **Consolidated  Statements of Shareholders’ Equity for the six-month periods endedJune 30, 2001 and 2000** |   |
|           |                                                                                                                 |   |
|           | **Consolidated  Statements of Cash Flows for the six-month periods endedJune 30, 2001 and 2000**                |   |
|           |                                                                                                                 |   |
|           | **Notes  to Unaudited Consolidated Financial Statements**                                                            |   |
|           |                                                                                                                 |   |
| **Item  2.**   | **Management  Discussion and Analysis of Financial Condition and Results of Operations**                        |   |
|           |                                                                                                                 |   |
| **Item  3.**   | **Quantitative  and Qualitative Disclosures About Market Risk**                                                 |   |
|           |                                                                                                                 |   |
| **PART II.**   | **OTHER INFORMATION**                                                                                                |   |
|           |                                                                                                                 |   |
| **Item 1.**    | **Legal  Proceedings**                                                                                               |   |
|           |                                                                                                                 |   |
| **Item  4.**   | **Submission  of Matters to a Vote of Security Holders**                                                             |   |
|           |                                                                                                                 |   |
| **Item  6.**   | **Exhibits  and Reports on Form 8-K**                                                                                |   |
|           |                                                                                                                 |   |
| **SIGNATURES** |                                                                                                                 |   |

 

| CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) |
|------------------------------------------------------------|
|                                                       |
| *Dollars in thousands*                                     | June  30, 2001 |   | December  31, 2000 |   |
|                                                            |  |
| *Assets*                                                   |   |   |   |   |
|                                                       |   |   |   |   |
|                                                       | Cash  and due from banks |   |   |   |   |
|                                                       | Non-interest-bearing | $ | 65,970 |   | $ | 70,566 |   |
|                                                       | Interest-bearing | 88 |   | 8,295 |   |
|                                                       | Federal  funds sold and securities purchased |   |   |   |   |
|                                                       | under agreements to resell | 12,550 |   | 7,467 |   |
|                                                       | Securities available for sale | 829,704 |   | 840,489 |   |
|                                                       | Securities held to maturity | -- |   | 64,741 |   |
|                                                       | Loans receivable | 1,794,774 |   | 1,776,108 |   |
|                                                       | Allowance for losses on loans | (18,916 | ) | (17,561 | ) |
|                                                       |   |  |
|                                                       | Net loans receivable | 1,775,858 |   | 1,758,547 |   |
|                                                       |   |   |   |   |   |
|                                                       | Loans held for sale | 43,860 |   | 14,187 |   |
|                                                       | Interest receivable | 17,237 |   | 19,762 |   |
|                                                       | Other real estate | 10,565 |   | 9,909 |   |
|                                                       | Premises and equipment | 53,593 |   | 58,466 |   |
|                                                       | Goodwill and other intangible assets | 19,425 |   | 20,701 |   |
|                                                       | Other assets | 13,848 |   | 9,740 |   |
|                                                       |   |  |
|                                                       | Total assets | $ | 2,842,698 |   | $ | 2,882,870 |   |
|                                                       |  |
| *Liabilities*                                              |   |   |   |   |
|                                                       |   |   |   |   |
|                                                       | Deposits: |   |   |   |   |
|                                                       | Non-interest-bearing | $ | 241,662 |   | $ | 244,100 |   |
|                                                       | Interest-bearing | 1,461,082 |   | 1,473,008 |   |
|                                                       |   |  |
|                                                       | Total deposits | 1,702,744 |   | 1,717,108 |   |
|                                                       |   |   |   |   |   |
|                                                       | Federal Home Loan Bank (FHLB) advances | 695,178 |   | 643,200 |   |
|                                                       | Securities sold under agreements to repurchase | 186,326 |   | 274,920 |   |
|                                                       | Guaranteed preferred beneficial interests in  subordinated debt | 40,000 |   | 40,000 |   |
|                                                       | Other borrowings | 11,168 |   | 1,753 |   |
|                                                       | Other liabilities | 20,343 |   | 27,153 |   |
|                                                       |   |  |
|                                                       | Total liabilities | 2,655,759 |   | 2,704,134 |   |
|                                                       |   |   |   |   |   |
| *Shareholders’ Equity*                                |   |   |   |   |
|                                                       |   |   |   |   |
|                                                       | Common  stock, no par value |   |   |   |   |
|                                                       | Authorized  shares 30,000,000 |   |   |   |   |
|                                                       | Issued and outstanding: 15,561,329 and 15,494,357 shares | -- |   | -- |   |
|                                                       | Paid-in-capital | 26,745 |   | 26,291 |   |
|                                                       | Retained earnings | 164,259 |   | 159,613 |   |
|                                                       | Accumulated other  comprehensive loss | (2,979 | ) | (5,500 | ) |
|                                                       | Debt related to employee stock ownership plan (ESOP) | (1,086 | ) | (1,668 | ) |
|                                                       |   |  |
|                                                       | Total shareholders' equity | 186,939 |   | 178,736 |   |
|                                                       |   |  |
|                                                       | Total liabilities and shareholders’ equity | $ | 2,842,698 |   | $ | 2,882,870 |   |
|                                                       |   |  |
|                                                            |  |  |  |  |  |  |  |  |  |

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)For the three and six month periods endedJune 30, 2001 and 2000

|                                             | Three-month  periods                                 |   | Six-month  periods |   |
|--------------------------------------------------|------------------------------------------------------|--------|--------------------|--------|
| *Dollars in thousands, except per share amounts* | 2001                                                 |   | 2000               |   | 2001 |   | 2000 |   |
|                                                  |
| *Interest Income*                                |                                                 |   |               |   |   |   |   |   |
|                                             | Loans receivable and loans held for sale             | $      | 39,369             |   | $ | 40,001 |   | $ | 79,104 |   | $ | 78,603 |   |
|                                             | Securities available for sale                        | 13,305 |               | 12,829 |   | 27,286 |   | 25,822 |   |
|                                             | Securities held to maturity                          | --     |               | 1,101  |   | -- |   | 2,176 |   |
|                                             | Other                                                | 106    |               | 406    |   | 437 |   | 880 |   |
|                                             |                                                 |        |                    |        |  |  |  |  |  |
|                                             | 52,780                                               |   | 54,337             |   | 106,827 |   | 107,481 |   |
| *Interest Expense*                               |                                                 |   |               |   |   |   |   |   |
|                                             | Deposits                                             | 16,123 |               | 14,685 |   | 34,013 |   | 28,895 |   |
|                                             | FHLB advances and other borrowings                   | 8,285  |               | 11,556 |   | 17,573 |   | 21,678 |   |
|                                             | Securities sold under agreements to repurchase       | 2,869  |               | 4,418  |   | 7,147 |   | 8,694 |   |
|                                             | Guaranteed  preferred beneficial interests in        |   |               |   |   |   |   |   |   |
|                                             | subordinated debt                                    | 988    |               | 987    |   | 1,975 |   | 1,975 |   |
|                                             |                                                 |        |                    |        |  |  |  |  |  |
|                                             | 28,265                                               |   | 31,646             |   | 60,708 |   | 61,242 |   |
| Net interest income                              | 24,515                                               |   | 22,691             |   | 46,119 |   | 46,239 |   |
|                                             |                                                 |   |               |   |   |   |   |   |
|                                             | Provision for losses on loans                        | 1,400  |               | 1,400  |   | 2,800 |   | 1,950 |   |
|                                             |                                                 |        |                    |        |  |  |  |  |  |
| Net interest income after provision for          |                                                 |   |               |   |   |   |   |   |
| losses on loans                                  | 23,115                                               |   | 21,291             |   | 43,319 |   | 44,289 |   |
|                                             |                                                 |   |               |   |   |   |   |   |
| *Non-interest Income*                            |                                                 |   |               |   |   |   |   |   |
|                                             | Service fees                                         | 3,080  |               | 3,012  |   | 6,133 |   | 5,764 |   |
|                                             | Investment product fees and insurance commissions    | 647    |               | 641    |   | 1,222 |   | 1,476 |   |
|                                             | Gain on sale of loans                                | 518    |               | 57     |   | 971 |   | 33 |   |
|                                             | Gain (loss) on sale of securities available for sale | 446    |               | (6,781 | ) | 1,144 |   | (6,775 | ) |
|                                             | Gain on sale of partnership                          | --     |               | --     |   | 574 |   | -- |   |
|                                             | Other                                                | 644    |               | 599    |   | 1,196 |   | 1,516 |   |
|                                             |                                                 |        |                    |        |  |  |  |  |  |
|                                             | 5,335                                                |   | (2,472             | )      | 11,240 |   | 2,014 |   |
| *Non-interest Expense*                           |                                                 |   |               |   |   |   |   |   |
|                                             | Compensation and employee benefits                   | 9,663  |               | 10,063 |   | 19,081 |   | 19,846 |   |
|                                             | General and administrative                           | 5,427  |               | 4,471  |   | 9,866 |   | 8,793 |   |
|                                             | Occupancy and equipment                              | 3,126  |               | 2,511  |   | 6,102 |   | 4,993 |   |
|                                             | Data processing                                      | 1,765  |               | 1,293  |   | 3,591 |   | 2,507 |   |
|                                             | Loss  from real estate write-downs                   |   |               |   |   |   |   |   |   |
|                                             | and operations                                       | 44     |               | 2,119  |   | 60 |   | 2,347 |   |
|                                             | Conversion and integration                           | 434    |               | 3,210  |   | 1,290 |   | 3,527 |   |
|                                             | Severance and employment agreements                  | 200    |               | 3,205  |   | 200 |   | 3,205 |   |
|                                             | Impairment of goodwill                               | --     |               | 748    |   | -- |   | 748 |   |
|                                             |                                                 |        |                    |        |  |  |  |  |  |
|                                             | 20,659                                               |   | 27,620             |   | 40,190 |   | 45,966 |   |
|                                             |                                                 |   |               |   |   |   |   |   |
| Income (loss) before income tax expense          | 7,791                                                |   | (8,801             | )      | 14,369 |   | 337 |   |
|                                             |                                                 |   |               |   |   |   |   |   |
| Income tax expense (benefit)                     | 2,916                                                |   | (2,668             | )      | 5,373 |   | 589 |   |
|                                             |                                                      |        |                    |        |  |  |  |  |
| Net income (loss)                                | $                                                    | 4,875  |               | $      | (6,133 | ) | $ | 8,996 |   | $ | (252 | ) |
|                                             |                                                      |        |                    |        |  |  |  |  |
| Basic net income (loss) per share                | $                                                    | 0.31   |               | $      | (0.40 | ) | $ | 0.58 |   | $ | (0.02 | ) |
|                                             |                                                      |        |                    |        |  |  |  |  |
| Diluted net income (loss) per share              | $                                                    | 0.31   |               | $      | (0.40 | ) | $ | 0.57 |   | $ | (0.02 | ) |
|                                             |                                                      |        |                    |        |  |  |  |  |
| Dividends declared per share                     | $                                                    | 0.14   |               | $      | 0.14 |   | $ | 0.28 |   | $ | 0.28 |   |
|                                             |                                                      |        |                    |        |  |  |  |  |

 

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  Loss** | ** **   | **Debt****Related****To****ESOP** | ** **   | **Total** | ** **   |
|--------------------------------------------|---------------------------------------------------------------------------------------------------------|--------------|------------------------|--------------|--------------------------|--------------|---------------------------------------------|--------------|-----------------------------------|--------------|-----------|--------------|
| ****                                       |
| January  1, 2000                           | 15,800,377                                                                                              |         | $                      | 33,297       |                     | $            | 162,043                                     |         | $                                 | (20,640      | )         | $            | (2,980 | ) | $ | 171,720 |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| Dividends declared, $0.28 per share        |                                                                                                    |         |                   |         | (4,348                   | )            |                                        |         |                              |         | (4,348    | )            |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| Issuance of common stock:                  |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Stock option plans                                                                                      | 52,954       |                   | 366          |                     |         |                                        |         |                              |         |      | 366          |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| ESOP debt repayment                        | 24,600                                                                                                  |         |                   |         |                     |         |                                        |         | 656                               |         | 656       |         |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| Purchase and retirement of common stock    | (468,000                                                                                                | )            | (7,861                 | )            |                     |         |                                        |         |                              |         | (7,861    | )            |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| Comprehensive loss:                        |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Net loss                                                                                                |         |                   |         |                     | (252         | )                                           |         |                              |         |      | (252         | ) |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Other comprehensive loss -                                                                              |         |                   |         |                     |         |                                        |         |                              |         |      |         |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Unrealized loss on securities available for sale, net  of taxes of $2,245                               |         |                   |         |                     |         |                                        | (4,169       | )                                 |         |      | (4,169       | ) |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |   |
|                                       | Reclassification adjustment for gains included in net  income, net of taxes of $2,371                   |         |                   |         |                     |         |                                        | 4,404        |                              |         |      | 4,404        |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |   |
| Total comprehensive loss *                 |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         | (17       | )            |
|                                            |
| June  30, 2000                             | 15,409,931                                                                                              |         | $                      | 25,802       |                     | $            | 157,443                                     |         | $                                 | (20,405      | )         | $            | (2,324 | ) | $ | 160,516 |   |
|                                            |
|                                       |                                                                                                    | *** *** |                   | *** *** |                     | *** *** |                                        | *** *** |                              | *** *** |      | *** *** |
| January  1, 2001                           | 15,494,357                                                                                              |         | $                      | 26,291       |                     | $            | 159,613                                     |         | $                                 | (5,500       | )         | $            | (1,668 | ) | $ | 178,736 |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| Dividends declared, $0.28 per share        |                                                                                                    |         |                   |         | (4,350                   | )            |                                        |         |                              |         | (4,350    | )            |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| Issuance of common stock:                  |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       |  Stock option plans                                                                                | 45,718       |                   | 454          |                     |         |                                        |         |                              |         |      | 454          |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| ESOP debt repayment                        | 21,254                                                                                                  |         |                   |         |                     |         |                                        |         | 582                               |         | 582       |         |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| Comprehensive income:                      |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Net income                                                                                              |         |                   |         |                     | 8,996        |                                        |         |                              |         |      | 8,996        |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Other comprehensive income -                                                                            |         |                   |         |                     |         |                                        |         |                              |         |      |         |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Reclassification of securities held to maturity to  securities available for sale, net of taxes of $321 |         |                   |         |                     |         |                                        | (597         | )                                 |         |      | (597         | ) |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Unrealized gain on securities available for sale, net  of taxes of $2,079                               |         |                   |         |                     |         |                                        | 3,861        |                              |         |      | 3,861        |   |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
|                                       | Reclassification adjustment for gains included in net  income, net of taxes of $401                     |         |                   |         |                     |         |                                        | (743         | )                                 |         |      | (743         | ) |
|                                       |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         |      |         |
| Total  comprehensive income *              |                                                                                                    |         |                   |         |                     |         |                                        |         |                              |         | 11,517    |         |
|                                            |
| June  30, 2001                             | 15,561,329                                                                                              |         | $                      | 26,745       |                     | $            | 164,259                                     |         | $                                 | (2,979       | )         | $            | (1,086 | ) | $ | 186,939 |   |
|                                            |
|                                            |                                                                                                         |              |                        |              |                          |              |                                             |              |                                   |              |           |              |  |  |  |  |  |  |  |  |  |

* Comprehensive Income (Loss) for the three months endedJune 30, 2001 and 2000 was $3,462 and $(77), respectively.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Six-month  periods ended June 30, *Dollars in thousands*2001 2000 *Operating Activities*         Net income (loss)$8,996 $(252)Adjustments to reconcile net income to net     cash  provided by operating activities:     Depreciation3,238 2,751  Amortization of intangible assets1,277 966  Impairment of goodwill-- 748  Provision for losses on loans2,800 1,950  Write-downs on other real estate-- 2,168  Amortization (accretion) of premiums and discounts, net(105)112  Gain on sale of loans(971)(33) Loss (gain) on sale of securities available for sale(1,144)6,775  Gain on sale of other real estate(58)(100) Loan fees deferred, net of amortization1,391 311  FHLB stock dividends(1,435)(1,426)Changes in operating assets and liabilities:     Interest receivable2,525 (186) Other assets(4,108)(15,822) Other liabilities(8,165)13,356   Net cash provided by operating activities$4,241 $11,318      *Investing Activities*          Purchases of  securities available for sale(211,438)(46,553) Proceeds  from maturing and principal     repayments on securities available for sale258,501 42,756  Proceeds from sale of securities available for sale35,026 126,337  Proceeds  from maturing and principal     repayments on securities held to maturity-- 1,761  Proceeds from sale of loans66,588 92,939  Net increase in loans  receivable(120,403)(214,983) Proceeds from sale of other real estate3,839 2,499  Improvements  capitalized to other real estate(825)(210) Purchases of premises  and equipment(3,565)(3,988) Proceeds from sales of  premises and equipment5,200 --  Purchases  of FHLB stock-- (770) Net increase in  federal funds sold and securities     purchased under  agreements to resell(5,083)(15,500)   Net cash provided by (used in) investing activities$27,840 $(15,712)
 

 
 Six-month  periods ended June 30, *Dollars in thousands*2001 2000 *Financing Activities*          Net increase (decrease) in deposits$(10,591)$14,832  Net increase  (decrease) in certificates of deposit(3,773)(29,074) Proceeds  from FHLB advances, securities sold under     agreements to repurchase, and other borrowings1,362,150 960,016  Repayment  of FHLB advances, securities sold under     agreements to  repurchase and other borrowings(1,388,770)(936,479) Dividends paid to  shareholders(4,354)(4,421) Purchase and  retirement of common stock-- (7,861) Issuance of common stock from exercise of stock options454 366   Net cash used in financing activities(44,884)(2,621) Net decrease in cash  and due from banks(12,803)(7,015)     *Cash and due from banks*     Beginning of period78,861 114,062   End of period$66,058 $107,047   *Supplemental Disclosures of Cash Flow Information*          Cash  paid during the period for:     Interest$60,318 $55,536  Income taxes5,500 9,630  Non-cash  investing and financing activities:     Loans receivable transferred to other real estate3,612 4,223  Premises and equipment transferred to other real estate-- 279  Loans receivable securitized as securities available  for sale-- 25,021  Transfer  of securities from held to maturity     to available for sale64,741 --  ESOP debt repayment582 656 
 

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

**NOTE A**BASIS OF PRESENTATION

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

The unaudited consolidated financial statements includethe accounts of Pacific Northwest Bancorp and its wholly owned subsidiaries(collectively PNWB).  As of June 30,2001, Pacific Northwest Bancorp’s wholly owned subsidiaries were Pacific NorthwestBank and InterWest Capital Trust I.  Allmaterial inter-company transactions and balances have been eliminated.

The preparation of the consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates requires management to make estimates and assumptions that affectamounts reported in the consolidated financial statements.  Changes in these estimates and assumptionsare considered reasonably possible and may have a material impact on theconsolidated financial statements and thus actual results could differ from theamounts reported and disclosed herein.

The unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States for completefinancial statements.  In the opinion ofmanagement, all adjustments necessary for a fair presentation are reflected inthe unaudited interim consolidated financial statements.  The consolidated statements of income forthe three and six-month periods ended June 30, 2001 and 2000 are not necessarilyindicative of the operating results for the full year.  For further information, refer to theconsolidated financial statements and footnotes for the most recent annualperiod, December 31, 2000.

**NOTE B**  RECLASSIFICATIONS

Certain reclassifications have been made to priorfinancial statements to conform to current presentation.  The effects of the reclassifications are notconsidered material.

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

Basicnet income per share is calculated by dividing net income by the weightedaverage number of common shares outstanding during the period.  Diluted net income per share is calculatedby dividing net income by diluted weighted average shares outstanding, whichincludes common stock equivalent shares outstanding using the treasury stockmethod, unless such shares are anti-dilutive. Common stock equivalents include shares issuable upon exercise of stockoptions.  Unallocated shares relating tothe money purchase employee stock ownership plan debt obligation are deductedin the calculation of weighted average shares outstanding.
Thefollowing table presents the computation of basic and diluted net income pershare for the three and six-month periods ended June 30:
 Three months Six months *Dollars in thousands, except share and per share amounts*2001 2000 2001 2000 **Numerator:**                 Net income (loss)$4,875 $(6,133)$8,996 $(252)              **Denominator:**                 Denominator for basic net income per share-         Weighted average shares15,534,482 15,433,527 15,522,934 15,543,303 Effect of dilutive securities:         Stock options165,605 0 126,623 0   Denominator for diluted net income per share- Weighted average shares and assumed conversion         of dilutive stock options15,700,087 15,433,527 15,649,557 15,543,303  Basic net income (loss) per share$0.31 $(0.40)$0.58 $(0.02) Diluted net income  (loss) per share$0.31 $(0.40)$0.57 $(0.02) 
**NOTE D**CONVERSION AND INTEGRATION EXPENSES

During the year ended December 31, 2000,PNWB initiated the process of converting its various subsidiary bank operatingsystems to a single enhanced operating system. The conversion was completed on April 9, 2001.  Conversion and integration expenses are expensed asincurred.  Total expenses associatedwith conversion and integration efforts were $434,000 and $3.2 million duringthe three-month periods ended June 30, 2001 and 2000, respectively.  Conversion and integration expenses were$1.3 million and $3.5 million for the six-month periods ended June 30, 2001 and2000, respectively.  As of June 30,2001, PNWB had an accrued liability of $100,000 related to conversion andintegration expenses that will be paid out during 2001.

**NOTE E**SEVERANCE AND EMPLOYMENT AGREEMENT EXPENSES

In conjunction with executive management changes andelimination of duplicate administrative functions, PNWB incurred $200,000 and$3.2 million in severance and employment agreement expenses during thethree-month periods ended June 30, 2001 and 2000, respectively.  Such expenses were $200,000 and $3.2 millionfor the six-month periods ended June 30, 2001 and 2000, respectively.  There are approximately a total of 40employees affected by these severance and employment agreements.  For the six-month period ended June 30,2001, $400,000 was paid out in accordance with the terms of the severance andemployment agreements.  As of June 30,2001, PNWB had an accrued liability of $2.1 million related to these agreementsthat will be paid out in future periods.

**NOTE F**BUSINESS SEGMENT INFORMATION

Between the period August 1996, andOctober 1999, PNWB acquired six commercial banking institutions. Subsequent tothe acquisitions of Pacific Northwest Bank, First National Bank of PortOrchard, Pioneer Bank and Kittitas Valley Bank in 1998 and The Bank of Tukwilain 1999, PNWB was managed at the subsidiary bank level.  Each subsidiary bank had a board ofdirectors and an executive management team responsible for the operation andperformance of the respective subsidiary bank.
During the year ended December 31, 2000,PNWB consolidated its executive management functions and implemented a neworganizational structure while consolidating the subsidiary banks into a singlecommercial bank using a single operating system.  Effective July 1, 2000, Pacific Northwest Bank and The Bank ofTukwila were merged into InterWest Bank. Effective September 1, 2000,InterWest Bank changed its name to Pacific Northwest Bank.  As a result of these organizationalchanges, the financial information that is used by the chief operating decisionmaker in allocating resources and assessing performance is only provided forone reportable segment for the three and six-month periods ended June 30, 2001.

**NOTE G** SECURITIES PLEDGEDUNDER AGREEMENTS TO REPURCHASE

Securities pledged under agreements torepurchase were $187.3 million and $299.6 million as of June 30, 2001 andDecember 31, 2000, respectively, which were included in securities availablefor sale and securities held to maturity in the consolidated statements offinancial condition.  PNWB reclassifiedall securities held to maturity to securities available for sale on January 1, 2001upon adoption of SFAS No. 133.

**NOTE H** ACCOUNTING CHANGES

In June 1998, the Financial Accountingand Standards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.”In June 2000, the FASB issued SFAS No. 138, which amended certain provisions ofSFAS No. 133 to clarify specific areas presenting difficulties inimplementation.  SFAS No. 133, asamended by SFAS No. 138, establishes accounting and reporting standards forderivative instruments, including certain derivative instruments imbedded inother contracts, and for hedging activities. It requires the recognition of all derivatives as either assets orliabilities in the statement of financial condition and the measurement ofthose instruments at estimated fair value. In certain defined conditions, a derivative may be specificallydesignated as a hedge for a particular exposure.  The accounting for derivatives depends on the intended use of thederivatives and the resulting designation. This statement was adopted by PNWB on January 1, 2001. The adoption ofthis statement did not have a material impact on PNWB’s financial condition orresults of operations.  As permitted bythe provisions of this statement, PNWB reclassified all securities held tomaturity to securities available for sale on January 1, 2001.  This reclassification resulted in othercomprehensive loss of $597,000, net of income taxes of $321,000.

In September 2000, the FASB issued SFAS No. 140“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities,” a replacement of SFAS No. 125.  This statement revises the standards for accounting forsecuritizations and other transfers of financial assets and collateral and requirescertain disclosures; however, it carries over most of SFAS No. 125’s provisionswithout reconsideration.  The standardsaddressed in this statement are based on consistent application of a financialcomponents approach that focuses on control. Under this approach, after a transfer of financial assets, an entityrecognizes the financial and servicing assets it controls and the liabilitiesit has incurred, derecognizes financial assets when control has beensurrendered, and derecognizes liabilities when extinguished.  This statement is effective for transfersand servicing of financial assets and extinguishment of liabilities occurringafter March 31, 2001.   This statementwas effective for recognition and reclassification of collateral and fordisclosures relating to securitization transactions and collateral for fiscalyear 2000.  The adoption of thisstatement affects the disclosures in PNWB’s financial statements; however, theadoption of this statement did not have a material impact on PNWB’s financialcondition or results of operations.

In July 2001, the FASB issued SFAS No. 141 “Accountingfor Business Combinations”.  Thisstatement eliminated pooling-of-interests method of accounting for businesscombinations except for qualifying business combinations that were initiatedprior to July 1, 2001.  It furtherclarifies the criteria for recognizing intangible assets separately fromgoodwill.  The requirements of Statement141 are effective for any business combination accounted for by the purchasemethod that is completed after June 30, 2001. The adoption of this statement did not have a material impact on PNWB’sfinancial condition or results of operations.
In July 2001, the FASB issued SFAS No. 142 “Accountingfor Goodwill and Other Intangible Assets”. Under SFAS No. 142, goodwill and indefinite lived intangible assets areno longer amortized but are reviewed annually for impairment or more frequentlyif impairment indicators arise. Separable intangible assets that are not deemed to have an indefinitelife will continue to be amortized over their useful lives.  The amortization provisions of SFAS No. 142apply to goodwill and intangible assets acquired after June 30, 2001.  This Statement will become effective onJanuary 1, 2002. Management believes thatthe adoption of SFAS No. 142 will nothave a material impact on PNWB’s financialcondition or results of operations.****Item 2.   MANAGEMENT DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION****             AND RESULTSOF OPERATIONS**

Thefollowing discussion is provided for the unaudited consolidated financialcondition and results of operations of Pacific Northwest Bancorp, whichincludes its wholly owned subsidiaries (collectively PNWB).  As of June 30, 2001, Pacific NorthwestBancorp’s wholly owned subsidiaries were Pacific Northwest Bank and InterWestCapital Trust I.  The purpose of thisdiscussion is to focus on significant factors concerning PNWB’s financialcondition and results of operations. This discussion should be read along with the unaudited consolidatedfinancial statements for an understanding of the following discussion andanalysis. Certain reclassifications havebeen made to prior year balances to conform to current presentation.  The effects of the reclassifications are notconsidered material.

Pacific Northwest Bancorp is a bankholding company incorporated in the state of Washington.  PNWB is a financial services companyproviding a variety of products and services for both business and individualcustomers.  Financial services of PNWBinclude the banking activities of accepting deposits from businesses andindividuals and originating commercial and commercial real estate loans,residential loans, consumer loans and agricultural loans.  PNWB continues to change the composition ofthe loan portfolio and the deposit base as part of the migration to acommercial bank.  These changes aredesigned to have a positive impact on net interest income and service feerevenue while continuing to meet the needs of PNWB’s customers.

Pacific Northwest Bancorp completed theacquisition of six commercial banking institutions between 1996 and 1999, whichadded a total of $668 million in assets as measured at the respectiveacquisition dates.  The following tablesummarizes pertinent information related to the completed acquisitions:
Acquisition  Total  Assets At Acquisition Date Common  Shares DateInstitution (dollars  in thousands) Issued August 31, 1996Central Bancorporation  (1) $206,093 2,147,391 January 15, 1998Puget Sound Bancorp,  Inc.(1) 53,109 586,420 June 15, 1998Pacific Northwest Bank  (1) 200,219 2,346,081 June 16, 1998Pioneer Bancorp, Inc.  (1) 108,399 692,846 August 31, 1998Kittitas Valley  Bancorp, Inc. (2) 47,441 229,831*October 1, 1999NBT Northwest Bancorp  (2) 53,018 677,109 
(1)         Pooling-of-interestsmethod of accounting(2)         Purchase method of accounting

* Additionally, $6.4 million in cash waspaid to Kittitas shareholders.

A source of future growth may be throughmergers and acquisitions.  PNWB’smanagement believes that many other financial institutions are consideringselling their institutions for a variety of reasons, including lack ofshareholder liquidity, management succession issues, technology challenges, andincreasing competition. PNWB actively reviews proposals for various acquisitionopportunities.  PNWB has a due diligencereview process to evaluate potential acquisitions and has establishedparameters for potential acquisitions relating to market factors, financialperformance and certain non-financial factors. Successful completion of acquisitions by PNWB depends on several factorssuch as the availability of suitable acquisition candidates, necessaryregulatory and shareholder approval and compliance with applicable capitalrequirements.  No assurance can be madethat acquisition activity will continue in the future.

Currently, PNWB conducts its businessthrough 55 financial centers in western and central Washington State.  Investments are available through PacificNorthwest Financial Services and insurance products are available throughPacific Northwest Insurance Agency, wholly owned subsidiaries of PacificNorthwest Bank.
**RESULTS OF OPERATIONS**

PNWB had net income of $4.9 million for the three-monthperiod ended June 30, 2001, compared to net loss of $6.1 million for thethree-month period ended June 30, 2000. Diluted net income per share was $0.31 for the three-month period endedJune 30, 2001, compared to diluted net loss per share of ($0.40) for thethree-month period ended June 30, 2000. PNWB’s return on average shareholders’ equity was 10.45 percent for thethree-month period ended June 30, 2001, compared to (14.96) percent for thethree-month period ended June 30, 2000. PNWB’s return on average assets was 0.69 percent for the three-monthperiod ended June 30, 2001, compared to (0.87) percent for the three-monthperiod ended June 30, 2000.  Results forthe three-month period ended June 30, 2000 included losses on the sale ofsecurities available for sale as well as expenses associated with conversionand integration initiatives, severance and employment agreements, and assetwrite-downs.

PNWB had net income of $9.0 million for the six-monthperiod ended June 30, 2001 compared to net loss of $(0.3) million for thesix-month period ended June 30, 2000. Diluted net income per share was $0.57 for the six-month period endedJune 30, 2001, compared to diluted net loss per share of $(0.02) for thesix-month period ended June 30, 2000. PNWB’s return on average shareholders’ equity was 9.79 percent for thesix-month period ended June 30, 2001, compared to (0.30) percent for thesix-month period ended June 30, 2000. PNWB’s return on average assets was 0.63percent for the six-month period ended June 30, 2001, compared to (0.02)percent for the six-month period ended June 30, 2000.

The following table summarizes net income (loss), netincome (loss) per share and key financial ratios for the three and six-monthperiods ended June 30:
 Three  months Six  months *Dollars in thousands, except per share amounts*2001 2000 2001 2000 Net income (loss)$4,875 $(6,133)$8,996 $(252) Basic net income (loss) per share$0.31 $(0.40)$0.58 $(0.02) Diluted net income (loss) per share$0.31 $(0.40)$0.57 $(0.02) Return on average shareholders’ equity10.45%(14.96)%9.79%(0.30)%         Return on average assets0.69%(0.87)%0.63%(0.02)%         Net interest margin3.68%3.46%3.48%3.54%         Efficiency ratio69.21%127.41%70.07%95.84%
*Net Interest Income* | PNWB’s net income is significantly affected by changesin net interest income, which is the difference between interest incomereceived on loans receivable and other interest-earning assets and interestpaid on deposits and borrowings.  PNWB’soperations are sensitive to changes in interest rates and the resulting impacton net interest income.  While marketrates began falling in the first quarter of 2001, the positive impact on netinterest income was delayed until the second quarter since short-termborrowings and certificates of deposit reprice according to maturityschedules.  Furthermore,interest rate changes have a greater initial impact on loan yields than on thecost of deposits and borrowings as variable rate loans repriceimmediately.  PNWB continues to change the composition of its balance sheet to reduceits interest rate sensitivity. Management does not expect that rate reductions and improvement in netinterest income and net interest margin will continue at the same rate duringthe second half of 2001.
Net interest income was $24.5 million for the three-monthperiod ended June 30, 2001, compared to $22.7 million for the three-monthperiod ended June 30, 2000.  Thisincrease in net interest income was primarily due to a more significantdecrease in the cost of funds compared to the decrease in yield on earningassets, which resulted in an increase in net interest margin.  Net interest income was $46.1 million forthe six-month period ended June 30, 2001, compared to $46.2 million for thesix-month period ended June 30, 2000.  Thisdecrease in net interest income was due to a decrease in net interest marginpartially offset by an increase in the average balance of interest-earningassets.

Interest income was $52.8 million for the three-monthperiod ended June 30, 2001, compared to $54.3 million for the three-monthperiod ended June 30, 2000.  Interestincome was $106.8 million for the six-month period ended June 30, 2001,compared to $107.5 million for the six-month period ended June 30, 2000.  The decrease was due to lower yields earnedon interest-bearing assets partially offset by an increase in the averagebalance of loans receivable.  The yieldon interest-earning assets was 7.96 percent for the three-month period endedJune 30, 2001, compared to 8.29 percent for the three-month period ended June30, 2000.  The yield on interest-earningassets was 8.08 percent for the six-month period ended June 30, 2001, comparedto 8.23 percent for the six-month period ended June 30, 2000.  This decrease was primarily due to loweryields earned on both loans receivable and investment securities as a result oflower market interest rates.  This waspartially offset by a change in the composition of average loans receivablewith a greater percentage comprised of commercial loans with higher yields.

Interest expense was $28.3 million for the three-monthperiod ended June 30, 2001, compared to $31.6 million for the three-monthperiod ended June 30, 2000. This decrease was due to a decrease ininterest-bearing liabilities and the cost of funds.  The cost of funds was 4.76 percent for the three-month periodended June 30, 2001, compared to 5.23 percent for the three-month period endedJune 30, 2000. The cost of funds decreased primarily due to reductions ofmarket interest rates in the first half of 2001 during which certificates ofdeposits repriced accrording to maturity schedule and borrowings matured andwere replaced by borrowings with relatively lower interest rates.  Interest expense was $60.7 million for thesix-month period ended June 30, 2001, compared to $61.2 million for thesix-month period ended June 30, 2000. This decrease was primarily due to a decrease in the average balance ofinterest-bearing liabilities.

Net interest margin, which is net interest income dividedby average interest-earning assets, was 3.68 percent for the three-month periodended June 30, 2001, compared to 3.46 percent for the three-month period endedJune 30, 2000.  The increase in netinterest margin was primarily due to a decrease in cost of funds and anincrease in the balance of non-interest-bearing deposits.  Net interest margin was 3.48 percent for thesix-month period ended June 30, 2001, compared to 3.54 percent for thesix-month period ended June 30, 2000. The decrease in net interest margin was primarily due to a decrease inthe yield earned on interest-earning assets partially offset by an increase inthe balance of non-interest-bearing deposits.
*Average Rates and Balances* | The following table indicates the average balance andaverage interest rates earned or paid, interest rate spread and net interestmargin for the three-month periods ended June 30:
 2001 2000     Average   Average   *Dollars in thousands*Balance Rate Balance Rate Loans receivable and loans         held for sale$1,811,001 8.71%$1,764,630 9.07%Securities available for sale,         securities  held to maturity and         other interest-earning assets847,456 6.33%856,369 6.70% Total interest-earning assets2,658,457 7.96%2,620,999 8.29% Interest-bearing deposits1,486,962 4.35%1,335,619 4.40%FHLB advances, securities         sold  under agreements         to repurchase and         other borrowings893,365 5.45%1,084,324 6.26%          Total interest-bearing liabilities2,380,327 4.76%2,419,943 5.23% Non-interest-bearing deposits$234,312   $214,862            Net interest spread  3.20%  3.06%     Net interest margin  3.68%  3.46%     
The following table indicates the average balance andaverage interest rates earned or paid, interest rate spread and net interestmargin for the six-month periods ended June 30:
 2001 2000     Average   Average   *Dollars in thousands*Balance Rate Balance Rate Loans receivable and loans         held for sale$1,801,679 8.83%$1,749,797 8.98%Securities available for sale,         securities held to maturity and         other interest-earning assets853,725 6.49%862,774 6.69% Total interest-earning assets2,655,404 8.08%2,612,571 8.23% Interest-bearing deposits1,496,737 4.58%1,348,233 4.29%FHLB advances, securities         sold  under agreements         to repurchase and         other borrowings902,758 5.96%1,059,373 6.11%          Total interest-bearing liabilities2,399,495 5.10%2,407,606 5.09% Non-interest-bearing deposits$230,162   $212,933            Net interest spread  2.97%  3.14%     Net interest margin  3.48%  3.54%     
 

The following table provides information on changes innet interest income for the periods that are attributable to changes ininterest rates and changes in volume:
 Three-month  periods June 30, 2001 Vs. 2000 Six-month  periods June 30, 2001 Vs. 2000  Increase  (Decrease) Increase  (Decrease)  Due  to changes in Due  to changes in *Dollars in thousands*Rate Volume Total Rate Volume Total *Interest-earning assets*                         Loans receivable and             loans held for sale$(1,641)$1,009 $(632)$(1,457)$1,958 $501              Securities available for             sale, securities held             to  maturity and other             interest-earning assets(777)(148)(925)(853)(302)(1,155) Total net change in income             on interest-earning assets(2,418)861 (1,557)(2,310)1,656 (654) *Interest-bearing liabilities*                         Interest-bearing deposits167 (1,605)(1,438)(1,680)(3,438)(5,118)             FHLB advances, securities             sold under agreement to             repurchase  and other             borrowings2,036 2,783 4,819 902 4,750 5,652  Total net change in expense             on interest-bearing liabilities2,203 1,178 3,381 (778)1,312 534  Net change in net             interest income$(215)$2,039 $1,824 $(3,088)$2,968 $(120) 
*Provisionfor losses on loans* |The provision for losses on loans was $1.4 million for the three-month periodended June 30, 2001, compared to $1.4 million for the three-month period endedJune 30, 2000. The provision for losses on loans was $2.8 million for thesix-month period ended June 30, 2001, compared to $2.0 million for thesix-month period ended June 30, 2000. Management increased the provision for losses on loans during thequarter ended June 30, 2000 as a result of the continuous assessment of knownand inherent risk characteristics in the loan portfolio.  Theserisk characteristics include changes in the size and composition of the loanportfolio, delinquency levels, actual loan loss experience, current economicconditions, and detailed analysis of individual loans for which fullcollectibility may not be assured. Management believes the allowance for losses on loans was adequate as ofJune 30, 2001.

*Non-interest Income* | Non-interest income was $5.3 million for thethree-month period ended June 30, 2001, compared to $(2.5) million for thethree-month period ended June 30, 2000. Non-interest income was $11.2 million for the six-month period endedJune 30, 2001, compared to $2.0 million for the six-month period ended June 30,2000.  Theincrease in non-interest income was primarily due to increases in gains on saleof loans, gains on sale of securities available for sale and a gain on sale ofan equity interest in a partnership.
Gainson the sale of loans were $518,000 for the three-month period ended June 30,2001 compared to $57,000 for the three-month period ended June 30, 2000.  Gains on the sale of loans were $971,000 forthe six-month period ended June 30, 2001 compared to $33,000 for the six-monthperiod ended June 30, 2000. As partof the transition to a commercial bank, PNWB changed its strategy with regardsto the origination and retention of single-family mortgage loans during2000.  The majority of PNWB’ssingle-family mortgage loan production is channeled to the secondary marketwith less single-family mortgages retained in the loan portfolio.

Gains on the sale of securitiesavailable for sale were $446,000 and $1.1 million for the three and six-monthperiod ended June 30, 2001, respectively, compared to a loss of $6.8 millionfor the three and six-month periods ended June 30, 2000.  Thegains during the three and six-month periods ended June 30, 2001 were primarilyfrom the sale of mortgage-backed securities that were securitized from PNWB’ssingle-family mortgage loan portfolio in prior periods.

Servicefees were $3.1 million for the three-month period ended June 30, 2001 comparedto $3.0 million for the three-month period ended June 30, 2000.  Service fees were $6.1 million for thesix-month period ended June 30, 2001 compared to $5.8 million for the six-monthperiod ended June 30, 2000.  Thisincrease is primarily due to increased fees received on deposit accounts.

*Non-interestExpense* |Non-interest expense was $20.7 million for the three-month period ended June30, 2001, compared to $27.6 million for the three-month period ended June 30,2000.  Non-interest expense was $40.2million for the six-month period ended June 30, 2001, compared to $46.0 millionfor the six-month period ended June 30, 2000. Non-interest expense for the three and six months ended June 30, 2000included conversion and integration expenses, costs associated with severanceand employment agreements, goodwill impairment and write-downs on other realestate.

As discussed previously, the companycompleted acquisitions of four commercial banks during fiscal year 1998 and oneduring the three-month period ended December 31, 1999.  During 2000, PNWB began the process of convertingto a single enhanced operating system for the entire company.  The conversion was completed on April 9,2001.

Compensation and employee benefits were$9.7 million for the three-month period ended June 30, 2001, compared to $10.1million for the three-month period ended June 30, 2000.  Compensation and employee benefits were$19.1 million for the six-month period ended June 30, 2001, compared to $19.8million for the six-month period ended June 30, 2000.  This decrease in compensation and employee benefits was primarilydue to the consolidation of certain executive and administrative functions.

Occupancy and equipment expense was $3.1million and $6.1 million for the three and six-month periods ended June 30,2001, respectively, compared to $2.5 million and $5.0 million for the three andsix-month periods ended June 30, 2000. Data processing expense was $1.8 million and $3.6 million for the threeand six-month periods ended June 30, 2001, respectively, compared to $1.3 millionand $2.5 million for the three and six-month periods ended June 30, 2000.  The increase in occupancy and equipment anddata processing expense reflects increased costs associated with PNWB’s newcommercial bank operating system.

*Income Tax Expense*| Income tax expense was $2.9 million for the three-monthperiod ended June 30, 2001, compared to an income tax benefit of $2.7 millionfor the three-month period ended June 30, 2000. Income tax expense was $5.4million for the six-month period ended June 30, 2001, compared to income taxexpense of $589,000 for the six-month period ended June 30, 2000.  The increase in income tax expenses wasconsistent with the higher income before taxes adjusted for permanentdifferences for tax purposes.****REVIEW OF FINANCIAL CONDITION**

PNWB’s consolidated assets were $2.84 billion as of June30, 2001, compared to $2.88 billion as of December 31, 2000.

*Securities*| As of June 30,2001, PNWB had $829.7 million of securities available for sale, compared to$840.5 million as of December 31, 2000. As permitted by the provisionsof SFAS No. 133, PNWB reclassified all securities held to maturity tosecurities available for sale effective January 1, 2001.  As such, PNWB did not have any securitiesheld to maturity as of June 30, 2001, compared to $64.7 million as of December31, 2000.

PNWB maintains liquidity in accordancewith an internal liquidity policy. Liquidity levels may be increased or decreased depending upon the yieldson investment alternatives, management's judgment as to the attractiveness ofthe yields then available in relation to other opportunities, and management'sexpectation of the yield that will be available in the future.  Management's projections as to theshort-term demand for funds to be used for loan originations and otheractivities can also affect liquidity levels.

Securities classified as available forsale are reported at estimated fair value, with unrealized gains and losses(net of income taxes) reported in accumulated other comprehensive income(loss), a separate component of shareholders' equity.

*LoansReceivable and Loans Held for Sale* | Net loans receivable were$1.78 billion as of June 30, 2001, compared to $1.76 billion as of December 31,2000.  Growth in loans receivable wouldhave been more significant during the six-month period ended June 30, 2001;however, approximately $40 million of single-family mortgage loans were soldduring the period.

Commercialloans outstanding totaled $505.8 million as of June 30, 2001, an increase of$66.3 million from December 31, 2000. Commercial real estate mortgage loans outstanding totaled $468.5 millionas of June 30, 2001, an increase of $42.9 million from December 31, 2000.  Commercial and commercial real estate loansoutstanding represented 52.7 percent of total gross loans as of June 30, 2001,an increase from 48.1 percent of total gross loans as of December 31,2000.  Growth in commercial lendingshould shorten duration risk, increase net interest margin, create betterprotection from interest rate volatility and ultimately meet the needs of PNWB’scustomers.

Single-familyresidential mortgage loans outstanding totaled $401.8 million as of June 30,2001 compared to $418.7 million as of December 31, 2000.  As partof the transition to a commercial bank, PNWB changed its strategy with regard to the originationand retention of single-family mortgage loans during 2000.  The majority of PNWB’s single-familymortgage loan production is being channeled directly to the secondary marketwith servicing rights released.

Realestate construction loans outstanding totaled $300.3 million as of June 30,2001 compared to $330.3 million as of December 31, 2000.

Loansheld for sale totaled $43.9 million as of June 30, 2001 compared to $14.2million as of December 31, 2000.  Loansheld for sale are carried at the lower of cost or estimated fair value inaggregate.  Loans held for sale aregenerally single-family mortgage loans and loans originated under a SmallBusiness Administration program.  Loansheld for sale are typically sold to other financial institutions.
Thefollowing table sets forth the composition of PNWB’s loan portfolio by type asof the dates indicated:
*Dollars in thousands*June  30, 2001 December  31, 2000 Commercial loans$505,816 $439,540 Real estate mortgage loans     Single-family residential401,815 418,741  Commercial468,546 425,643 Real estate construction300,337 330,267 Consumer loans119,472 127,635 Agricultural loans52,332 57,224   1,848,318 1,799,050 Less:     Loans held for sale43,860 14,187  Allowance for losses on loans18,916 17,561  Deferred loan fees and discounts9,684 8,755  Net loans receivable$1,775,858 $1,758,547    
*Non-performing Assets* | Loans are generally placed on non-accrual when theybecome past due over 90 days, or 120 days if they are single-family mortgageloans, or when the collection of interest or principal is consideredunlikely.  Loans past due over 90 or 120days that are not on non-accrual status must be well secured by tangible collateraland in the process of collection.  PNWBdoes not return a loan to accrual status until it is brought current withrespect to both principal and interest and future principal payments are nolonger in doubt.  When a loan is placedon non-accrual status, any previously accrued and uncollected interest isreversed from interest income.  PNWBperforms a review of its loan portfolio for weaknesses in credit quality on anongoing basis to identify problem loans. This review results in internal loan classifications based on riskcharacteristics and loan performance. The overall objective of this review process is to identify trends inthe credit quality of the loan portfolio and to determine the level of loss exposureto evaluate the need for an adjustment to the allowance for losses on loans.

Non-accrual loans totaled $16.4 million as of June 30,2001 compared to $13.9 million as of December 31, 2000. Other real estate was$10.6 million as of June 30, 2001 compared to $9.9 million as of December 31,2000.  Total non-performing assets,including non-accrual loans and other real estate, totaled $27.0 million or0.95 percent of consolidated assets as of June 30, 2001, compared to $23.8million or 0.83 percent of consolidated assets as of December 31, 2000.  The increase in non-performing assets fromDecember 31, 2000 was primarily due to the placement of a $3.4 millioncommercial real estate loan on non-accrual status during the first quarter of2001 as well as increases in non-accrual agricultural loans of $1.6million.  Non-accrual agricultural loansincreased due to the weakness of the agricultural economy in centralWashington.
The following table summarizes non-performing assets asof the dates indicated:
*Dollars in thousands*June  30, 2001 December  31, 2000 *Non-accrual loans*         Commercial loans$1,958 $2,032 Real estate mortgage loans     Single-family residential3,209 5,020  Commercial6,319 1,414 Real estate construction1,700 3,920 Consumer loans263 225 Agricultural loans2,938 1,272   Total non-accrual loans16,387 13,883       Other real estate10,565 9,909  Total non-performing assets$26,952 $23,792  
*Allowancefor Losses on Loans* |The allowance for losses on loans was $18.9 million or 1.05 percent of loansreceivable as of June 30, 2001, compared to $17.6 million or 0.99 percent ofloans receivable as of December 31, 2000. Net loan charge-offs were $1.4 million or 0.16 percent of the averagebalance of loans outstanding for the six-month period ended June 30, 2001.  Net loan charge-offs were $1.6 million or0.18 percent of the average balance of loans outstanding for the six-monthperiod ended June 30, 2000.

The allowance for losses on loans ismaintained at an amount to sufficiently provide for estimated losses based onevaluating known and inherent risks in the loan portfolio.  Management analyzes certain factorsunderlying the quality of the loan portfolio. These factors include changes in the size and composition of the loanportfolio, delinquency levels, actual loan loss experience, current economicconditions, and detailed analysis of individual loans for which fullcollectibility may not be assured. The appropriate amount of the allowance forlosses on loans is estimated based upon factors and trends identified bymanagement.

When available information confirms thatspecific loans, or portions thereof, are uncollectible, these amounts arecharged off against the allowance for losses on loans. The existence of some orall of the following criteria will generally confirm that a loss has beenincurred: the loan is significantly delinquent and the borrower has notevidenced the ability or intent to bring the loan current; there is no recourseto the borrower, or if there is recourse, the borrower has insufficient assetsto pay the debt; the fair value of the loan collateral is significantly belowthe current loan balance, and there is little or no near-term prospect forimprovement.  A provision for losses onloans, which is a charge against income, is added to the allowance for losseson loans based on ongoing assessments of credit risk in the loan portfolio.

PNWB believes it has established itsallowance for losses on loans in accordance with accounting principles generallyaccepted in the United States.  However,there can be no assurance that in the future, regulators, when reviewing PNWB'sloan portfolio, will not request PNWB to increase its allowance for losses onloans, thereby affecting PNWB's financial condition and results of operations.

PNWB maintains an estimated allowance forlosses on loans based on the analyses conducted by management and creditpersonnel.  The allowance for losses onloans is allocated to 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 forlosses on loans is an important credit management tool, the entire allowancefor losses on loans is available for the entire loan portfolio.  Management reviewed the allocations in thevarious loan categories and believes the allowance for losses on loans wasadequate as of June 30, 2001.
The following tables summarize theactivity in allowance for losses on loans during the three and six-monthperiods ended June 30:
 Three  months Six  months *Dollars in thousands*2001 2000 2001 2000 Allowance as of beginning of period$18,303 $15,369 $17,561 $15,182          Provision for losses on loans1,400 1,400 2,800 1,950          Recoveries192 96 488 179          Charge-offs(979)(1,327)(1,933)(1,773) Allowance as of end of period$18,916 $15,538 $18,916 $15,538  
*Goodwill and Other IntangibleAssets*| Goodwill arising fromacquisitions represents the excess of the purchase price over the estimatedfair value of net assets acquired.

Other intangible assets consist of coredeposit intangibles and loan servicing rights. Loan servicing rights are capitalized when acquired either through thepurchase or origination of loans that are subsequently sold or securitized withthe servicing rights retained. The estimated fair value of loan servicingrights at the date of the sale of loans is determined based on the discounted presentvalue of expected future cash flows using key assumptions for servicing incomeand costs and prepayment rates on the underlying loans. The estimated fairvalue is periodically evaluated for impairment by comparing actual cash flowsand estimated future cash flows from servicing assets to those estimated at thetime servicing assets were originated. Loan servicing rights are amortized as an offset to service fees inproportion to and over the period of estimated net servicing income.

Goodwill and other intangible assets areamortized using the straight-line and accelerated methods over periods notexceeding twenty years.

Goodwill and other intangible assetsconsisted of the following as of the dates indicated:
*Dollars in thousands*June  30, 2001 December  31, 2000 Goodwill$16,697 $17,242 Core deposit intangibles510 598 Loan servicing intangibles2,218 2,861   $19,425 $20,701    
*Deposits*| PNWB offers various types of deposit accounts, including checking accounts, savingsaccounts, money market accounts and certificate of deposit accounts.  Deposit accounts vary as to terms; theprincipal differences are the minimum balance required, the time period thefunds must remain on deposit, the interest rate, and the deposit or withdrawaloption.  PNWB relies on generatingdeposits through a marketing strategy that employs a sales staff responsiblefor establishing new customer relationships. As part of initiatives to improve liquidity and to reduce overallfunding costs, PNWB began to use brokered and wholesale certificates of depositduring 2000.

Non-interest-bearingdeposits were $241.7 million as of June 30, 2001 compared to $244.1 million asof December 31, 2000. Non-interest-bearing deposits represented 14.2 percent of total depositsas of June 30, 2001 and December 31, 2000, respectively.  Interest-bearing transaction accounts (whichinclude interest-bearing checking, money market and savings accounts) totaled$570.8 million as of June 30, 2001 compared to $569.7 million as of December31, 2000.  Interest-bearing transactionaccounts represented 33.5 percent of total deposits as of June 30, 2001,compared to 33.2 percent as of December 31, 2000.
Certificatesof deposit totaled $890.2 million as of June 30, 2001, compared to $903.4million as of December 31, 2000. Certificates of deposit represented 52.3 percent of total deposits as ofJune 30, 2001, a decrease from 52.6 percent as of December 31, 2000.

The following table sets forth thebalances of deposits by account type as of the dates indicated:
*Dollars in thousands*June  30, 2001 December  31, 2000 Non-interest-bearing deposits$241,662 $244,100 Interest-bearing checking accounts200,135 201,894 Money market accounts280,209 266,933 Savings accounts90,493 100,831 Certificates of deposit890,245 903,350  Total$1,702,744 $1,717,108    
*FHLB Advances and Securities Sold Under Agreements toRepurchase* |PNWB borrows through advances from the Federal Home Loan Bank (FHLB) andsecurities sold under agreements to repurchase with third parties. Theseborrowing sources totaled $881.5 million as of June 30, 2001 compared to $918.1million as of December 31, 2000.  Theneed for this type of borrowings decreased as a result of the overall decreasein assets and increase in shareholder’s equity, partially offset by decreasesin deposits.

The FHLB provides credit for memberfinancial institutions.  As members,financial institutions are required to own capital stock in the FHLB, and areauthorized to apply for advances on the security of such stock, certain homemortgages and other assets (principally securities that are obligations of, orguaranteed by, the United States). Advances are made to member financial institutions pursuant to severaldifferent programs.  These programs aregenerally designed to meet the financial institution's need while stillreflecting market terms and conditions. Pacific Northwest Bank uses advances from the FHLB to supplement fundsavailable to lend and to meet liquidity guidelines.  Interest rates on these advances vary in response to generaleconomic conditions.

PNWB also uses the securities market for borrowings byutilizing its securities available for sale as collateral. These borrowings arecollateralized by securities with an estimated fair value exceeding the facevalue of the borrowings.

*Other borrowings*|Other borrowings were $11.2 million as ofJune 30, 2001 compared to $1.8 million as of December 31, 2000.  This increase is due to Pacific NorthwestBancorp borrowing $10 million from another financial institution during thesix-month period ended June 30, 2001. This borrowing qualifies as Tier IIcapital under the capital guidelines of the Federal Reserve Board.

*Guaranteed Preferred Beneficial Interests in SubordinatedDebt*  |On November 15, 1999, $40 million of 9.875percent Capital Securities were issued by InterWest Capital Trust I (theTrust).  The proceeds of the offeringwere invested by the Trust in junior subordinated debentures of PacificNorthwest Bancorp.  The debentures heldby the Trust are the sole assets of the Trust. The capital securities are subject to mandatory redemption, in whole orin part, upon repayment of the debentures. The debentures will not mature earlier than November 15, 2009, and notlater than November 15, 2029.  PacificNorthwest Bancorp entered into agreements which, taken collectively, fully andunconditionally guarantee the capital securities subject to the terms of eachof the guarantees.  The capital securitiesqualify as Tier I capital under the capital guidelines of the Federal ReserveBoard.

*Shareholders’ Equity*| PNWB is committed to managing capital for maximum shareholder benefit andmaintaining strong protection for depositors and creditors.  PNWB manages various capital levels at boththe holding company and subsidiary bank level to maintain adequate capitalratios and levels in accordance with external regulations and capitalguidelines established by the Board of Directors.
PNWB’s total shareholders’ equity was$186.9 million as of June 30, 2001, an increase of $8.2 million from $178.7million as of December 31, 2000.  Theincrease in shareholders’ equity was due to net income, other comprehensiveincome, the issuance of common stock under stock option plans and repayments onthe ESOP loan partially offset by dividends declared to shareholders.  Book value per share was $12.01 as of June30, 2001, compared to $11.54 as of December 31, 2000.  During the six-month period ended June 30, 2001, Pacific NorthwestBancorp declared cash dividends totaling $0.28 per share.

**SUPERVISION AND REGULATION**

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

Pacific Northwest Bank is a member of theFederal Deposit Insurance Corporation (FDIC), and as such, is subject toexamination thereby.  Pacific NorthwestBank is a state-chartered commercial bank subject to regulation and supervisionby the Washington Department of Financial Institutions, Division of Banks.  In practice, the primary regulator makesregular examinations of the subsidiary bank subject to its regulatory review orparticipates in joint examinations with other regulators.  Areas subject to regulation by federal orstate 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 tobanking regulators are substantial and include, among other things, the abilityto assess civil monetary penalties, to issue cease-and-desist or removal ordersand to initiate injunctive actions against banking organizations andinstitution-affiliated parties, as defined. In general, enforcement actions must be initiated for violations of lawsand regulations and unsafe or unsound practices. Other actions, or inactions,may provide the basis for enforcement action, including misleading or untimelyreports filed with regulatory authorities. Applicable law also requires public disclosure of final enforcementactions.

Pacific Northwest Bancorp and PacificNorthwest Bank are subject to risk-based capital guidelines requiring minimumcapital levels based on the credit risk of assets.  Failure to meet minimum capital requirements can initiate certainmandatory and possibly additional discretionary, actions by regulators that, ifundertaken, could have a material effect on PNWB’s consolidated financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, PacificNorthwest Bancorp and Pacific Northwest Bank must meet specific capitalguidelines that involve quantitative measures of assets, liabilities andcertain off-balance-sheet items as calculated under regulatory accountingpractices.  Capital classifications arealso subject to qualitative judgments by the regulators about components, riskweightings and other factors.

The regulations define the relevantcapital levels for the five categories. In general terms, the capital definitions are as follows:
 Total Capital Tier 1 Tier 1  (to Risk (to Risk (to Average  Weighted Assets) Weighted Assets) Assets)     Well capitalized10% 6% 5% Adequately capitalized8% 4% 4% UndercapitalizedBelow 8% Below 4% Below 4% Significantly  undercapitalizedBelow 6% Below 3% Below 3% Critically  undercapitalized- - 2 or less% 
 

Pacific Northwest Bancorp is subject to risk-based capitalguidelines issued by the FRB, which establish a risk-adjusted ratiorelating capital to different categories of assets.  Tier I capital is comprised of shareholders’ equity andguaranteed preferred beneficial interests in subordinated debt less certainintangibles, and excludes the equity impact of adjusting securities availablefor sale to estimated fair value. Total capital is Tier I capital, theallowance for losses on loans and certain long-term debt that qualifies forinclusion as regulatory capital.  TheFRB’s risk-based capital rules have been supplemented by a leverage capitalratio, defined as Tier I capital to adjusted quarterly average totalassets.  As of June 30, 2001, under theFRB’s capital guidelines, PNWB’s levels of consolidated regulatory capital exceededthe FRB’s well-capitalized requirements. The capital amounts and ratios for Pacific Northwest Bancorp and PacificNorthwest Bank as of June 30, 2001 and December 31, 2000, are presented in thefollowing table:

**CAPITAL RATIOS**
         To Be Well          Capitalized Under      For Capital Prompt Corrective  Amount Adequacy Purposes Action Provisions  *Dollars in thousands*Amount Ratio Amount Ratio Amount Ratio **June 30, 2001**                         **Pacific Northwest Bancorp**            Total capital (to  risk-weighted assets)$241,406 11.40%$169,425 8.0%$211,782 10.0%Tier I capital (to  risk-weighted assets)212,490 10.03%84,713 4.0%127,069 6.0%Tier I capital (to  average assets)212,490 7.54%112,743 4.0%140,929 5.0%             **Pacific Northwest Bank:**            Total capital (to  risk-weighted assets)$238,524 11.31%$168,694 8.0%$210,868 10.0%Tier I capital (to  risk-weighted assets)219,608 10.41%84,347 4.0%126,521 6.0%Tier I capital (to  average assets)219,608 7.81%112,451 4.0%140,564 5.0%             **December 31, 2000**                         **Pacific Northwest Bancorp:** ** ** ** ** ** ** ** ** ** ** ** **Total capital (to  risk-weighted assets)$223,657 11.05%$161,912 8.0%$202,391 10.0%Tier I capital (to  risk-weighted assets)206,096 10.18%80,956 4.0%121,434 6.0%Tier I capital (to  average assets)206,096 7.23%114,066 4.0%142,583 5.0%             **Pacific Northwest Bank:**            Total capital (to  risk-weighted assets)$221,312 10.96%$161,548 8.0%$201,935 10.0%Tier I capital (to  risk-weighted assets)203,751 10.09%80,774 4.0%121,161 6.0%Tier I capital (to  average assets)203,751 7.30%111,703 4.0%139,629 5.0%
As of June 30, 2001, Pacific NorthwestBank was in compliance with well-capitalized capital requirements. Managementbelieves that under the current regulations Pacific Northwest Bank willcontinue to meet well-capitalized capital requirements in the foreseeablefuture.  However, events beyond thecontrol of Pacific Northwest Bank, such as a downturn in the economy in areaswhere Pacific Northwest Bank has most of its loans, could adversely affectfuture earnings and, consequently, the ability of Pacific Northwest Bank tomeet future well-capitalized capital requirements.

**LIQUIDITY RESOURCES**

Liquidity management focuses on the needto meet both short-term funding requirements and PNWB’s long-term strategiesand goals. Specifically, the objective of liquidity management is to ensure thecontinuous availability of funds to meet the demands of depositors, creditorsand borrowers. Management manages the balance sheet to meet these needs. PNWBdesires to attract and retain business and retail customer relationships with afocus on transaction accounts and commercial and consumer lending.  PNWB also uses wholesale funds throughadvances from the FHLB and the sale of securities under agreements torepurchase to fund asset growth and meet liquidity needs. PNWB also useswholesale and brokered certificates of deposit to supplement wholesaleborrowings.  Other sources of funds forliquidity include loan repayments, loan sales, security sales andmortgage-backed and related security repayments. Repayments on loans andmortgage-backed and related securities and deposit inflows and outflows areaffected by changes in interest rates.
PNWB has the capacity to borrow fundsfrom the FHLB through pre-approved credit lines.  These credit lines have pledge requirements whereby PNWB mustmaintain unencumbered collateral with a value at least equal to the outstandingbalance. PNWB also uses the securities market as a vehicle for borrowing byutilizing its securities available for sale as collateral.  These borrowings are collateralized bysecurities with an estimated fair value exceeding the face value of theborrowings. If the estimated fair value of the securities were to decline as aresult of an increase in interest rates or other factors, PNWB would berequired 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 areview of PNWB’s consolidated statement of cash flows for the six-month periodended June 30, 2001.  The consolidatedstatement of cash flows details PNWB’s operating, investing and financingactivities during the period.  The mostsignificant items under operating activities include net income of $9.0 millionfor the six-month period ended June 30, 2001 and a decrease in otherliabilities of $8.2 million and an increase of other assets of $4.1million.  Also included in operatingactivities are the add back of non-cash depreciation, amortization of intangibleassets and the provision for losses of loans totaling $7.3 million.  Net cash provided by operating activities isalso adjusted for the gains on the sale of loans and securities available forsale totaling $2.1 million.  Investingactivities included proceeds from maturing and principal repayments onsecurities available for sale of $258.5 million, purchases of securitiesavailable for sale of $211.4 million and proceeds from the sale of securitiesavailable for sale of $35.0 million. Investing activities also included a $120.4 million increase in loansreceivable, $66.6 million of proceeds from the sale of loans and a $5.1 millionincrease in federal funds sold.  Duringthe period, financing activities included $26.6 million in borrowingrepayments, net of borrowing proceeds, a $3.8 million decrease in certificatesof deposit, a $10.6 million decrease in deposits and a total of $4.4 millionpaid in cash dividends to shareholders.****Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

PNWB’s results of operations are largelydependent upon its ability to manage interest rate risk. Management considersinterest rate risk to be a significant market risk that could have a materialeffect on PNWB’s financial condition and results of operations.

PNWB is sensitive to potential changes ininterest rates and the resulting impact on net interest income.  It is an objective of management to reducethis sensitivity through the use of adjustable rate loans and short-termcommercial and consumer loans.  Thisenables PNWB to better match the duration of its deposit base with these typesof assets.

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

Management uses simulation analysis to measure PNWB’sinterest sensitivity position.  Thissimulation analysis is used to evaluate the effects of potential interest ratemovements on net interest income.  Thesimulation analysis model is dynamic in nature, and incorporates management’scurrent balance sheet strategy. Management develops assumptions regardinginterest rate spreads, projected balances, expected maturities, cash flows andprepayment assumptions under different interest rate scenarios.  Actual results will differ from simulated resultsdue to timing, magnitude, and frequency of interest rate changes and changes inmarket conditions and management strategies, among other factors.

For further information on interest rate risk, referenceis made to the sections “Net Interest Income” and “Average Rates and Balances”in Item 2. Management Discussion and Analysis of Financial Condition andResults of Operations contained in this quarterly report on Form 10-Q.  Information regarding the expectedmaturities of financial assets and financial liabilities has not changedmaterially from disclosures made in the Annual Report on Form 10-K for the yearended December 31, 2000.

**FORWARD-LOOKING STATEMENTS**

Inthis quarterly report on Form 10-Q, PNWB has included certain “forward-lookingstatements” concerning its future operations. Sentences containing words such as “may,” “will,” “expect,”“anticipate,” “believe,” “estimate,” “should,” “projected,” or similar wordsmay constitute forward-looking statements. Although PNWB believes that the expectations expressed in theseforward-looking statements are based on reasonable assumptions within thebounds of its knowledge of its business and operations, it is possible thatactual results may differ materially from these expectations.  PNWB has used these statements to describeexpectations and estimates in various areas, including, but not limited to:changes in the economy of the markets in which it operates; interest ratemovements; future acquisition and growth strategies; data processing systemconversions; the impact of competitive products, services and pricing; andlegislative, regulatory and accounting changes affecting the banking andfinancial services industry.  Actualresults could vary materially from the future results covered in forward-lookingstatements.  Factors such as interestrate trends and loan delinquency rates, as well as the general state of theeconomy in Washington state and the United States as a whole, could also causeactual results to vary materially from the future results anticipated in suchforward-looking statements. These factors should be considered in evaluatingthe forward-looking statements and undue reliance should not be placed on suchstatements.****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 and 3 are not applicable and have been omitted.**  **Item 4.****Submission of Matters to a Vote of Security Holders**   The Annual Meeting of Shareholders of Pacific Northwest  Bancorp (“Meeting”) was held on April 24, 2001.  The results of the vote on the matters presented at the Meeting  are as follows:   1.  The  following individuals were elected as directors:    Term  to Expire Vote  For Vote  Withheld       Larry Carlson2004 11,734,787 1,085,581  Michael T. Crawford2004 11,727,797 1,092,571  Jean Gorton2004 11,728,159 1,092,209  Betty Woods2004 11,727,241 1,093,127    The terms of Directors Gary M. Bolyard, Patrick M.  Fahey, Clark H. Mock, Stephen M. Walden, Barney R. Beeksma, C. Stephen Lewis  and Russel E. Olson continued after the meeting.   2.Proposal 2, Amendment to the Amended and Restated 1993  Incentive Stock Option Plan, was approved by a majority of the shares  represented in person or by proxy and entitled to vote.  The result of the vote was as follows:      For Against Abstain Total           Total Vote 7,100,874 2,036,505 205,301 9,342,680   Percentage 76.0% 21.8% 2.2% 100.0%    **Item 5 is not applicable and has been omitted.**  **Item 6.****Exhibits and Reports on Form 8-K**   **(a)****Exhibits**    3.1Articles 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).    3.2Bylaws 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).    3.2.1Amendment to the Bylaws adopted March 20, 2001 is filed  with this report.    10Material contracts of Pacific Northwest Bancorp  (incorporated by reference to Exhibits 10.1 through 10.14 to the Registrant’s  Annual Report on Form 10-K for the year ended December 31, 2000).    10.17Employment Agreement and its First Amendment entered  into between Pacific Northwest Bancorp and George P. Brace is filed with this  report.    10.18Letter of amendment to the Employment Agreement of Kim  S. Brace is filed with this report.
 
 **(b)****Reports on Form 8-K**    **None** 
 

**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly 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:  August10, 2001

 

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